Bad Decisions By Ethereum Foundation Hurt ETH Price, Hedge Fund CIO Says
14 Octobre 2024 - 10:00AM
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Zaheer Ebtikar, the Chief Investment Officer (CIO) and founder of
Split Capital—a hedge fund specializing in liquid token
investments—has attributed the Ethereum underperformance over the
last months to strategic missteps by the Ethereum Foundation and
structural shifts in crypto capital flows. In an analysis shared
via X (formerly Twitter), Ebtikar writes, “Independent of the
myriad of (probable) bad decisions that the ETH foundation & co
have made there’s another structural reason why ETH has traded like
a dog this cycle.” Why Is The Ethereum Price Lagging Behind?
Ebtikar began by emphasizing the importance of understanding
capital flows within the crypto market. He identified three primary
sources of capital flow: retail investors who engage directly
through platforms like Coinbase, Binance, and Bybit; private
capital from liquid and venture funds; and institutional investors
who invest directly through Exchange-Traded Funds (ETFs) and
futures. However, he noted that retail investors are “hardest to
quantify” and are “not fully present in the market today,” thus
excluding them from his analysis. Focusing on private capital,
Ebtikar highlighted that in 2021, this segment was the largest
capital base, driven by crypto euphoria that attracted more than
$20 billion in net new inflows. “Fast forward to today, private
capital is no longer the heavy hitter capital base as ETFs and
other traditional vehicles have taken the role of the largest net
new buyer of crypto,” he stated. He attributed this decline to a
series of poor venture investments and overhang from prior cycles,
which have “left a bad taste in the mouths of LPs.” These venture
firms and liquid funds recognized that they couldn’t wait out
another cycle and needed to be more proactive. They began taking
more “shots on target” for liquid plays, often through private
deals involving locked tokens such as Solana (SOL), Celestia (TIA),
and Toncoin (TON). “These locked deals also represented something
more interesting for a lot of firms—there’s a world outside of
Ethereum-based investing that is actually growing and usable and
has enough market cap growth relative to ETH that could justify the
underwriting of the investment,” Ebtikar explained. Related
Reading: Ethereum MVRV Score Signals Cooling Market Momentum – Time
To Buy? He noted that investors were aware it would be increasingly
difficult to raise funds for venture and liquid investments.
Without the return of retail capital, institutional products became
the only viable avenue for a bid for ETH. Mindshare began
fragmenting as the three-year mark of the 2021 vintage approached,
and products like BlackRock’s spot Bitcoin ETF (IBIT) gained
legitimacy as the de facto benchmark for crypto. Private capital
had to make a choice: “Abandon their core portfolio hold in ETH and
move down the risk curve or hold your breath for traditional
players to start bailing you out.” This led to the formation of two
camps. The first consisted of pre-ETF ETH sellers between January
and May 2024, who opted out of ETH and swapped to assets like SOL.
The second group, post-ETF ETH sellers from June to September 2024,
realized that ETF flows into ETH were lackluster and that it would
take much more for ETH’s price to gain support. “They understood
that the ETF flows were lackluster and it would take a lot more for
ETH price to begin being supportive,” Ebtikar noted. Turning his
attention to institutional capital, Ebtikar observed that when spot
Bitcoin ETFs like IBIT, FBTC, ARKB, and BITW entered the market,
they exceeded expectations. “These products broke any realistic
target investors and experts could’ve fathomed with their success,”
he stated. He emphasized that Bitcoin ETFs have become some of the
most successful ETF products in history. “BTC went from being a dog
in the average portfolio to now the only funnel for net new capital
in crypto and at a record rate too,” he said. Despite Bitcoin’s
surge, the rest of the market didn’t keep up. Ebtikar questioned
why this was the case, pointing out that crypto-native investors,
retail, and private capital had long since reduced their Bitcoin
holdings. Instead, they were “stuck in altcoins and Ethereum as the
core of their portfolio.” Consequently, when Bitcoin received its
institutional bid, few in the crypto space benefited from the new
wealth effect. “Few in crypto were beneficiaries of the newly made
wealth effect,” he remarked. Investors began to reassess their
portfolios, struggling to decide their next moves. Historically,
crypto capital would cycle from index assets like Bitcoin to
Ethereum and then down the risk curve to altcoins. However, traders
speculated on potential flows into Ethereum and similar assets but
were “broadly wrong.” The market started to diverge, and the
dispersion between asset returns intensified. Professional crypto
investors and traders moved aggressively down the risk curve, and
funds followed suit to generate returns. Related Reading: Ethereum
Faces ‘Sell-Off Risk’ If It Loses $2,300 Resistance – Analyst The
asset they chose to reduce exposure to was Ethereum—the largest
asset in their core portfolios. “Slowly but surely ETH started
losing steam to SOL and similar, and a non-trivial percentage of
this flow started really moving downstream to memecoins,” Ebtikar
observed. “ETH lost its moat in crypto-savvy investors, the only
group of investors who were historically interested in buying.”
Even with the introduction of spot ETH ETFs, institutional capital
paid little attention to Ethereum. Ebtikar described Ethereum’s
predicament as suffering from “middle-child syndrome.” He
elaborated, “The asset is not in vogue with institutional
investors, the asset lost favor in crypto private capital circles,
and retail is nowhere to be seen bidding anything at this size.” He
emphasized that Ethereum is too large for native capital to support
while other index assets like SOL and large caps like TIA, TAO, and
SUI are capturing investor attention. According to Ebtikar, the
only way forward is to expand the universe of potentially
interested investors, which can only happen at the institutional
level. “ETH’s best odds of making a material comeback (short of
changes to the core protocol’s trajectory) is to have institutional
investors pick up the asset in the coming months,” he suggested. He
acknowledged that while Ethereum faces significant challenges, it
is “the only other asset with an ETF and likely will be for some
time.” This unique position offers a potential avenue for recovery.
Ebtikar mentioned several factors that could influence Ethereum’s
future trajectory. He cited the possibility of a Trump presidency,
which could bring changes to regulatory frameworks affecting
cryptocurrency. He also pointed to potential shifts in the Ethereum
Foundation’s direction and core focus, suggesting that strategic
changes could reinvigorate investor interest. Additionally, he
highlighted the importance of marketing the ETH ETF by traditional
asset managers to attract institutional capital. “Considering the
possibility of a Trump Presidency, change at the Ethereum
Foundation’s direction and core focus, and marketing of the ETH ETF
by traditional asset managers, there are quite a few outs for the
father of smart contracting platforms,” Ebtikar remarked. He
expressed cautious optimism, stating that not all hope is lost for
Ethereum. Looking ahead to 2025, Ebtikar believes it will be a
critical year for cryptocurrency and especially for Ethereum. “2025
will very much be an interesting year for crypto and especially for
Ethereum as so much of the damage from 2024 can be unwound or
further deepened,” he concluded. “Time will tell.” At press time,
ETH traded at $2,534. Featured image created with DALL.E, chart
from TradingView.com
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